Texas Life Agent Practice Exam

When must insurable interest exist in relation to a life insurance application?

1. At the time of policy renewal

2. At the time of the claim

3. At the time of the application

4. At the time of investment

The correct answer is: At the time of the application

Insurable interest is a fundamental principle in life insurance that ensures the policyholder has a legitimate interest in the continued life of the insured individual. This requirement is intended to prevent moral hazard, where an individual might have a financial incentive to harm the insured. The correct answer emphasizes that insurable interest must exist at the time of the application for the life insurance policy. This means that when a person applies for a life insurance policy, they must demonstrate a valid interest in the life of the insured—typically in situations such as familial relationships, business partnerships, or other financial dependencies. Without this interest present at the time of application, the contract lacks validity, and the insurer has grounds to deny the policy. The significance of establishing insurable interest early in the process helps maintain the integrity of the insurance system by ensuring that policyholders are not simply betting on someone else's life without a genuine connection.